It seems a while since a budget contained any real surprises, especially when it is already printed on the front cover of the Evening Standard before the Chancellor even stands up; however in this case the extent of the Help To Buy Scheme announced was a gasp moment.
At first glance this will not just have house builders dancing in the streets, or first time buyers eager to take advantage of ever decreasing mortgage rates, but also those “mortgage prisoners” trapped with little equity who have been wondering how they will be able to move.
Although there is a danger that this will artificially push up the price of housing, or make buyers decide to hold their purchases until the second part of the scheme starts in January; taken together with a potential extension of the Funding for Lending Scheme this could give the housing market a real boost.
In brief, this scheme is in two parts; the first provides an equity loan to those buying a new build property of up to 20% of the purchase price. Therefore is you have 5% deposit the governments loan means you only need to borrow 75% from an appropriate lender. This loan is interest free for 5 years, but then costs 1.75% per annum which increases each year by RPI inflation plus 1%.
Funny that RPI has been chosen as this is apparently no longer an official statistic and it will be interesting to see what inflation rates are in 5 years time given the unknown effects of Quantitative Easing etc.!
The second part is the more contentious bit. This is a mortgage guarantee scheme that the government provides to the lender, in essence insuring up to 15% of a loan above 80% Loan-To-Value as long as the buyer has 5% deposit. This Mortgage Indemnity Guarantee should give lenders the impetuous to offer more high LTV loans and is available for all borrowers, (apart from Buy To Let), up to a property value of £600,000.
However, the devil really is in the detail and detractors have already pointed out some issues that need to be ironed out.
For this scheme to really work for example, there needs to be capital relief for lenders in conjunction with the scheme. In other words, as the government is insuring up to 15% of the loan why should lenders still have to provide the same amount of capital to be put aside as they do now for higher LTV borrowing? If this does not change then this does not really address one of the major issues lenders have.
One of the other main questions around the scheme will be whether or not lenders will impose the same tight credit scoring guidelines they currently adopt for high loan-to-value lending which continues to make it difficult for many to pass through the process unscathed. Hopefully the new scheme will allow them to return to less draconian but ultimately sensible underwriting processes that really will open up the doors for first time buyers and mortgage prisoners to take advantage of competitive rates.
There is also the question of policing the scheme. We know that Buy To Let mortgages will not be allowed and interest only mortgages barred from the scheme, but there is also a question over whether it can be “abused” by those looking for second properties for example.
No doubt there will be changes before this part of the scheme goes live in January and it strikes me as strange that schemes like this are released without the Government seemingly having spoken to anyone in the industry. After all any decent mortgage broker could have pointed out some of the issues straight away.
As they say, it is good to talk and it surely can’t be because they are afraid of any leaks!
For the full details, or what is available officially so far anyway, see the link here http://www.hm-treasury.gov.uk/10012.htm .